Foster-care charity loses 501(c)(3) status for funneling a percentage of its revenue to a for-profit management company owned by its founder and his wife

View official IRS release (PDF)

Plain-English summary

A tax-exempt charity that placed children in foster homes signed a
management agreement handing day-to-day control of its operations to a
for-profit management company. The catch: that company was founded and
controlled by the charity's own founder and former Executive Director,
and his wife was its incorporator and majority (or sole) shareholder. The
management fee was set as a percentage of the charity's gross revenue, so
the harder the charity worked and the more it grew, the more money flowed
to the insiders. The IRS found that most of the fee ended up as salaries
and distributions to the couple and their trusts, that the deal was never
put out for competitive bidding, and that the company controlled hiring,
budgeting, audits, and strategy. Under the operational test, a charity
cannot let its earnings inure to insiders or serve private rather than
public interests. Citing People of God Community and Church by Mail, the
IRS concluded the arrangement was private inurement and impermissible
private benefit, so the charity no longer operated exclusively for exempt
purposes. It revoked the 501(c)(3) exemption retroactively, meaning
contributions are no longer deductible and the organization must file
Form 1120. Because the agreement stays in place, the IRS said paying
excise taxes and making corrections would not save the exemption.

Ruling snapshot

• Question: Does a foster-care charity keep 501(c)(3) status when it
  pays a percentage of gross revenue to a for-profit management company
  controlled by its founder-insiders?
• Outcome: Revocation (exemption revoked, retroactive to the audit period)
• Key authorities: IRC §§ 501(c)(3), 170(b)(1)(A)(vi), 4958, 507(a)(2);
  Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1(c), (d), (f); People of God
  Community v. Commissioner, 75 T.C. 127 (1980); Church by Mail, Inc. v.
  Commissioner, 765 F.2d 1387 (9th Cir. 1985); United Cancer Council, Inc.
  v. Commissioner, 165 F.3d 1173 (1999)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: October 4, 2022

Number: 202306009
Taxpayer ID number (last 4 digits):
Form:
Person to contact:
Name:
ID number:
Telephone:
Fax:
UIL: 501.03-00
Last day to file petition with United States Tax Court:

CERTIFIED MAIL - Return Receipt Requested

Dear :

Why we are sending you this letter

This is a final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective
. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the
meaning of IRC Section 501(c)(3) because the organization's assets inure to the benefit of a private shareholder
or individual.

Organizations that are not exempt under Internal Revenue Code (IRC) Section 501 generally are required to file
federal income tax returns and pay tax, where applicable. For further instructions, forms and information please
visit IRS.gov.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination

If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

• The United States Tax Court,
• The United States Court of Federal Claims, or
• The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for
declaratory judgment under IRC Section 7428.

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above.
Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time
to file an action for declaratory judgment.

Where you can find more information

Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you
have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.
Keep the original letter for your records.

Sincerely,

[signature]
Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

cc:

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E

---

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities

Date: August 31, 2021

Taxpayer ID number:
Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:

Manager's Contact information:
Name:
ID number:
Telephone:

Response due date:

CERTIFIED MAIL - Return Receipt Requested

Dear :

Why you're receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue Code
(IRC) Section 501(c)(3).

If you agree

If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
   letter.

2. Send any information you want us to consider.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
   send additional information as stated in 1 and 2, above, you'll still be able to file a protest
   with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a Consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn't apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn't been addressed in published precedent
   or has been treated inconsistently by the IRS.

If you're considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal to
the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can
help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a
hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you
qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

For additional information

You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

If you have questions, you can contact the person shown at the top of this letter.

Enclosures:
Form 6018
Form 4621-A
Form 886-A
Pub 892
Pub 3498

Sincerely,

[signature]
Sean K. O'Reilly
Director, Exempt Organizations Examinations

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

---

Form 886-A
Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of taxpayer:
Tax Identification Number (last 4 digits):
Year/Period ended:

Revocation of Tax-Exempt Status
Treas. Reg. § 1.501(c)(3)-1(f)(2)(ii).

Issues:

1. Whether ( ) continues to qualify for exemption under
   Section 501(c)(3) of the Internal Revenue Code?

2. Whether revocation of exempt status under IRC §§ 501(c)(3) and 170(b)(1)(A)(vi)
   should be made retroactive to

Facts:

{ }

1. was incorporated in the state of on as
   ( )
   signed the Articles of Incorporation as Incorporator.

2. Form 1023 was submitted on ( ), wife of
   , signed the form as Admin. Assistant. is listed as
   Administrator.

3. received its Initial Determination Letter on . It received its
   Final Determination Letter on

4. On , amended its Articles of Incorporation to change its name
   from to

5. On merged with with being the surviving
   organization.

6. signed the merger agreement as Secretary of

{ }

1. was incorporated in the state of on , as

2. received its determination as a 501(c)(3) organization in as

3. On , amended its Articles of
   Incorporation to become

4. On changed its address from , ;
   to ; ; (same address as ).

5. On merged with , with being the surviving
   organization.

6. was the Executive Director of prior to the
   management Agreement with

{ }

1. was incorporated in the state of on . , Wife of
   , was listed as the sole Director.

2. Form 1120-S, U.S. Income Tax Return for an S Corporation, returns filed for
   tax years through lists one Schedule K-1, Shareholder's Share of
   Income, Deductions, Credits, etc., recipient. That Schedule K-1 was issued to
   and lists her as having % of Shareholder's percentage of stock ownership
   for tax year in . (Part 1-F)

3. In Form 1120-S listed Schedule K-1s for shareholders, ,
   , , and . (Parts 1-F)

4. Form 1120-S returns for through lists the same K-1 recipients with
   an equal Shareholder's percentage of stock ownership for tax year in

Management and Administration Agreement (Agreement)

1. The Agreement between and , dated states:

( ) is a management services company
established by founder and former Executive Director
to provide management consultation on an Agreement
for services basis to and other organizations as
appropriate opportunities arise. will provide executive,
fiscal. strategic and program development management for
. The Agreement will be based upon industry standards
and should be established at % initially and potentially grow,
based on reaching program and fiscal goals, to % or whatever
industry standard, fair market-fees are determined to be.

Due to the current challenges involved in assimilating into
and other budgetary constraints, recommends
an 'incremental transition' into the management services
Agreement relationship. The Agreement will begin at a rate
supported by fiscal ability and include executive
management and as the budget allows, the other services
listed above will be added as fiscally appropriate with
corresponding increases in the Agreement fees to %.

o The contractual Agreement between
and will be presented to the board for review
and approval upon its completion for retroactive initiation date of

e New Executive Director

o As of , will assume the title of Executive
Director and will continue to perform his duties under the
authority and direction of per the
management Agreement.

o last day on the payroll of
was to be ; the pay period ended on
and was inadvertently paid extra days on the
payroll.

2. The Agreement between and , dated states:

This Management and Administrative Services Agreement ("Agreement") is
made on , by and between an
Corporation (herein " " or Manager or Administrator) and
(a not-for-profit corporation) (herein " ").

a. Administration and Management.

i. hereby retains to provide management and
administrative services to to facilitate in
carrying out its various contractual Agreements and obligations to
provide stable and caring placements for youth in need of out-of-
home care according to the highest standards of professionalism
as follows:

shall recruit, recommend for selection and provide
oversight Executive Director who is responsible
for the fulfillment of contractual obligations.

shall provide, supervise and administer a
comprehensive program of quality standards and assurance
in compliance with applicable state and referring agency
regulations, standards and policies.

shall provide, supervise and administer appropriate
budgeting processes for to assure fiscal
responsibility in accordance with generally accepted
accounting practice and shall insure satisfactory
completion of an annual independent audit in compliance
with state and agency regulatory standards.

shall have responsibility for program development and
strategic planning to accomplish program objectives and to
provide for long term growth.

b. Manner & Place of Performance.

During the term of this Agreement shall have exclusive
discretion to determine the means, manner, methods and place of
its performance

c. Intellectual Property.

acknowledges that pursuant to the terms of this
Agreement will use and further develop confidential means and
methods and proprietary information that it has previously used
and developed relating to the administration the programs and
contractual obligations of and it is agreed that this
confidential information is and shall be the property of
further agrees that all ideas, programs, software,
works of authorship and other trade secrets developed or
improved shall not be considered to be "works made for hire" and
that shall be deemed the author thereof under the U.S.
Copyright Act.

signed the Agreement as Director of

3. A new Agreement was agreed to , with an effective date of
   . The differences between this Agreement and the
   Agreement are:

a. Administration and Management.

• (d) shall have responsibility for program development and
  strategic planning to accomplish program objectives and to provide for
  long term growth.

— (d) shall provide, supervise administration for program
development and strategic planning to accomplish program objectives
and to provide for long term growth.

Added:
(e) shall provide data management tools, specifically the use of
the for case management duties,
quality assurance reporting and invoicing and payments.

b. Term.

• This Agreement shall be in effect for a term of ( ) years
  commencing from the date of execution hereof and shall be
  automatically renewed for successive ( ) year periods
  thereafter unless either party shall give notice in writing of an
  intention to not-renew not less than days prior to any
  termination date.

• This Agreement shall be in effect for a term of ten (__)
  years commencing and shall be automatically
  renewed for successive ( ) year period thereafter unless
  either party shall give notice in writing of an intention to not-renew
  not less than days prior to any termination date.

c. Compensation.

— During an initial transition period, compensation paid to for
the services it provides pursuant to the terms of this Agreement shall
be paid pursuant to the following transition schedule:

% of receipts for the period from
through % of receipts
for the period from through % of
receipts for the period from
through % of receipts for the
period from and thereafter.

This transition schedule may be accelerated by mutual
Agreement of the parties. In any event, after the phase-in
period, the compensation to be paid to for the services
it provides pursuant to the terms of this Agreement shall be
paid monthly and adjusted annually to current market
standard rate or is equal to percent ( %) of
gross receipts.

• Compensation rates are in accordance with general
  business standards as researched and verified through
  organization filings, ranging from % to %. Current
  rate is % of gross revenue as adjusted for corrections and
  refunds less bad debt with adjustments made for annual
  reconciliation. Compensation may be increased based on
  current market analysis and mutual Agreement between
  both parties during the life of the Agreement.

d. General Terms.

Added-
(h) Assessment. Assessment and evaluation of the stated objectives will
be performed by the board of directors at a regularly scheduled board
meeting annually. Documentation of the periodic assessment and
evaluation will be recorded in the meeting minutes.

signed the Agreement as Director of

4. An addendum to the Agreement dated , dated
   , with an effective date of , states that the addendum was
   entered into by and between , an Corporation (herein
   " " or Manager or Administrator) and (a
   not-for-profit corporation) (herein " "). It states that this
   amendment is to adjust the Agreement entered between said parties dated
   , specifically the rate of compensation.

a. The term of ( ) years remains in effect beginning
with automatic renewal for successive years.

b. The compensation will increase from % to % of gross revenue as
adjusted for corrections and refunds less bad debt with adjustments
made for annual reconciliation.

c. It was also discussed, since the rate of % is lower than the industry
standard of %- %, the rate may be increased to % within the next
quarter.

d. This rate increase was discussed and voted into effect at the Board
Meeting of the Directors

signed the addendum as Asst. CEO of

5. An addendum to the Agreement dated , was entered into on
   , by and between , an Corporation
   (herein " " or Manager or Administrator) and ;
   (a not-for-profit corporation) (herein " "). It states that
   this amendment is to adjust the Agreement entered between said parties dated
   , specifically the rate of compensation.

a. The term of ( ) years remains in effect beginning
with automatic renewal for successive years.

b. The compensation will increase from % to % of gross revenue as
adjusted for corrections and refunds less bad debt with adjustments made
for annual reconciliation.

c. The effective date for said increase is retroactive to

d. This rate increase was discussed and voted into effect at the Board Meeting
of the Directors

signed the addendum as Asst. CEO of

A new Agreement between and and
was signed on . The differences between the
Agreement and the Agreement dated (effective )
with addendums effective , and are noted below.

1. Administration and Management.

(b) shall provide, supervise and administer a comprehensive
program of quality standards and assurance in compliance with
applicable state and referring agency regulations, standards and
policies;

(c) shall provide, supervise and administer appropriate budgeting
processes for to assure fiscal responsibility in
accordance with generally accepted accounting practice and
shall insure satisfactory completion of an annual independent audit in
compliance with state and agency regulatory standards;

(d) shall provide, supervise administration for program development
and strategic planning to accomplish program objectives and to
provide for long term growth.

(b) shall provide evaluation of a comprehensive program of
quality standards and assurance in compliance with
applicable state and referring agency regulations, standards
and policies;

(c) shall provide direction and evaluation of appropriate
budgeting processes for to assure fiscal
responsibility in accordance with generally accepted
accounting practice and shall assist in the
satisfactory completion of an annual independent audit in
compliance with state and agency regulatory standards;

(d) shall provide direction and evaluation for program
development and strategic planning to accomplish program
objectives and to provide for long term growth.

Added:

10. Contractual Compliance

is a provider to state and county agencies for child
welfare services and is subject to audits for such program, fiscal and
contractual performance. provides direction and evaluation to
the Agreement but does not perform the duties outlined in the state
Agreements, i.e., case management, licensing, foster parent
training. is a vendor providing a service to as
outlined in Section 1. Administration and Management.

signed the Agreement as Director of

Information Document Request (IDR)

1. An Information Document Request (IDR) dated , was
   issued to (IDR #2). Questions were asked concerning the
   Management and Administrative Agreements. answered those
   questions in a response dated

Question #1 - Why did decide that it needed a management services
company?
Answer - (hereafter referred to as ) retained
(hereafter referred to as ) to provide
management administrative services to to facilitate its
mission of providing foster care. had grown into
a larger more technologically complex organization. There was
a growing need for more technological sophistication in the
areas of support as well as a need to develop financial
management, strategic planning, legal and Agreement
management, audit support as well as the need to develop a
more effective IT system. became aware of the trend
among foster care providers to look to management companies
that would bring specialized technical knowledge and expertise,
allowing the core activities of child placement and family support
to remain the primary focus and priority of the program staff,
whose training and competency is in the area of social work.
The management services would bring technological support in
an increasingly more complex administrative environment.

In addition, a management company could supervise and
administer appropriate budgeting processes for to assure
fiscal responsibility in accordance with generally accepted
accounting practice.

Question #2 (a) Did have a different management services company in
the years before was incorporated? If yes, what was the
compensation rate paid to any other management services
companies? Please provide a copy of any other management
services Agreements before was hired.
Answer — N/A

Question #2 (b) If did not hire any other management services
companies before it hired , who previously performed the
services that are now being performed by ?
Answer — The key administrators of performed these duties.

Question #3 - Did put the management services out for competitive
bidding before awarding it to ?
Answer -
board of directors did not see a need to solicit bidding as the
team brought an extensive knowledge base in executive
leadership and the challenges that would face in the ever-
challenging field of foster care. The board of directors was
careful to ensure that the Agreement with was within fair
market values. The Agreement was actually established at a
lower than market standard fee structure, as evidenced by the
reviewed and included in this report.

Question #8 - Please provide a narrative description of the typical services
performs for in a given week including (c), Who performs
those services
Answer - is located in where a substantial amount of the
services are provided and travels extensively to all the
locations across states.

o During these office visits, team provides on-site and in-
person executive, financial, technology, legal, contract
relationships and program quality support. works closely
on a daily basis with executive management and top
managers in the departments on administrative issues,
progress, strategies, reports, upcoming projects, etc.
works daily with staff on items including but not limited
to:

o Handling the weekly and monthly financial reporting along
with ongoing assistance daily with accounting staff
on accounting/coding related questions.

o works closely with human resource staff on
personnel issues, including hiring and any disciplinary actions
that may need to address with personnel.

o oversees the IT department and assists with networking
and data integrity and availability. works daily with
IT department to assist with any problems, offer solutions and
help ensure the infrastructure is in place to support all of
current offices as well as planned growth. Included in the
fee is the use of a database tracking system called
which was developed to
and the requirements necessary per individual state
standards. Also, all required documentation for the foster
youth cases and foster homes are stored in
drives strategic quarterly goals including but not
limited to recruitment of new foster homes, dashboards on
financial data, dashboards on personnel data, quality
program outcomes, and generates a host of reports that
uses on a daily basis. The team works with
staff on configurations/requirement issues that arise in
various states.

on behalf of the board of directors provides
executive support and consultation to the executive
director and management team. The primary focus of this is
strategic planning around the achievement of economy of
scale which is essential for organizational survival in an
environment where small to medium sized programs are
finding it increasingly difficult to compete with the larger,
more technically astute, scale driven companies. The
board looks to to guide management to leverage
resources in the most forward-looking entrepreneurial way in
order to compete successfully in this challenging and
competitive environment. meets daily with
management leading the process of metrics based decision-
making, coordinating the development of strategic growth
plans for each region. The process involves
demographic analysis and tracking of recruitment metrics
and foster parent training participation and progress. Daily
discussion with managers revolves around the pressing
constraint of remaining viable through continuous and
effective strategic activity. executive support
professionals are experienced social program providers with
extensive training and experience in business and
organizational management.

Question #9 - Please provide a narrative description of the services performed
occasionally or on a set schedule e.g., monthly, quarterly, or
yearly and the services performed on an ad hoc/as needed
basis, including: c.) Who performs these?
Answer -
staff regularly travel to the sites in , ;
and . staff plan and conduct at least all staff in-
services a . These are conducted in various locations
across the country. leads these day in-services and
provides an array of training and leadership for the organization,
following up training events with transfer of learning sessions.

also leads quarterly director of strategy and development
meetings. These meetings again move from state to state. Full
office updates are presented for every office in . leads
and provides critical input on how to move each office forward
with quality and strategic growth. administrative team
attends bi-weekly department head meetings in . All
departments discuss the challenges they are experiencing in
their departments and receive support and technical assistance
from

Recruitment activities, marketing, strategizing around
demographics utilizing technology, and other
analytical tools. Director of Development and Marketing is
the coordinator of these activities, assisting program
directors with ongoing marketing and recruitment strategy.

supports program staff in the utilization of the data
management system, ( ) following up on help-desk
requests and solving configuration problems as identified
through our ongoing systems analysis process. develops
and maintains the internal IT infrastructure and consults with
software program writers. supports and trains staff
in the utilization of and other software
applications for case management processes. develops
and expands the utilization of the database features as the
need for more information evolves. coordinates the
installation and maintenance of low voltage hardware,
networking systems in offices and troubleshoots system
shutdowns. These and other support activities are performed
by the operational support team of several IT systems
specialists.

o provides fiscal oversight including accounts receivable,
accounts payable, and payroll processes. produces monthly
as well ad hoc financial reports for the executives and
board. Financial reports are presented quarterly to the board by

coordinates audit activities with state contract audits
and leads the annual independent audit process with the
independent auditing firm. ensures that all appropriate
processes and procedures are being followed in accordance
with GAAP and GAGAS and ensures all state specific
regulations and policies are complied with. State specific cost
reports are an ongoing process conducted by staff. The
financial activities and processes of are directed by an
professional with credentials and is assisted by an
state cost report specialist. organizes the annual
independent audit and works closely with staff and
independent auditors to ensure all information is available and
accurately reported. works closely with staff and other
outside auditors when is audited by other departments in
the different contract regions in which they do business.
produces annual budgets and reports quarterly results at
board meetings.

LAW:

Internal Revenue Code (IRC) §501(a) provides that an organization described in §501(c)(3) is
exempt from income tax.

IRC §501(c)(3) exempts from federal income tax corporations organized and operated
exclusively for charitable, educational, and other purposes, provided that no part of the net
earnings inure to the benefit of any private shareholder or individual.

Regulations §1.501(a)-1(c) defines "private shareholder or individual" in section 501 as
persons having a personal and private interest in the activities of the organization.

An IRC §170(b)(1)(A)(vi) organization is defined as an organization referred to in subsection
(c)(2) which normally receives a substantial part of its support (exclusive of income received in
the exercise or performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under §501(a)) from a
governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from
the general public.

IRC §170(c)(2)(B) defines a charitable organization as a corporation, trust, or community
chest, fund, or foundation that is organized and operated exclusively for religious, charitable,
scientific, literary, or educational purposes, or to foster national or international amateur sports
competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals;

Regulations §1.501(a)-1(c) states that the words private shareholder or individual in section
501 refer to persons having a personal and private interest in the activities of the organization.

Regulations §1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in Code §501(c)(3), an organization must be both organized and operated
exclusively for one or more of the purposes specified in such section. If an organization fails to
meet either the organizational test or the operational test, it is not exempt.

Regulations §1.501(c)(3)-1(b)(1) provides that an organization is organized exclusively for one
or more exempt purposes only if its articles of organization; (a) Limit the purposes of such
organization to one or more exempt purposes; (b) Do not expressly empower the organization
to engage, otherwise than as an insubstantial part of its activities, in activities which in
themselves are not in furtherance of one or more exempt purposes.

Regulations §1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated
exclusively" for one or more exempt purposes only if it engages primarily in activities that
accomplish one or more of such exempt purposes specified in Code §501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose. The existence of a substantial nonexempt purpose,
regardless of the number or importance of exempt purposes, will cause failure of the
operational test. Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Regulations §1.501(c)(3)-1(c)(2) provides that the operational test is not satisfied where any
part of the organization's earnings inure to the benefit of private shareholders or individuals,
and where the organization serves a private benefit rather than public interests.

Regulations §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than private
interest. Thus, it is necessary for an organization to establish that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or indirectly, by such
private interests. Prohibited private interests include those of unrelated third parties as well as
insiders. Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978);
American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). Private benefits include
an "advantage; profit; fruit; privilege; gain; [or] interest." Retired Teachers Legal Fund v.
Commissioner, 78 T.C. 280, 286 (1982).

Regulations §1.501(c)(3)-1(f)(ii) provides that In determining whether to continue to recognize
the tax-exempt status of an applicable tax-exempt organization described in section 501(c)(3)
that engages in one or more excess benefit transactions that violate the prohibition on
inurement under section 501(c)(3), the Commissioner will consider all relevant facts and
circumstances, including, but not limited to, the following -

(A) The size and scope of the organization's regular and ongoing activities that further
exempt purposes before and after the excess benefit transaction or transactions
occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively, if
more than one) in relation to the size and scope of the organization's regular and
ongoing activities that further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit transactions
with one or more persons;

(D) Whether the organization has implemented safeguards that are reasonably calculated
to prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning of
section 4958(f)(6) and § 53.4958-7), or the organization has made good faith efforts to
seek correction from the disqualified person(s) who benefited from the excess benefit
transaction.

The presence of a single substantial nonexempt purpose can destroy the exemption
regardless of the number or importance of exempt purposes. Better Bus. Bureau v. United
States, 326 U.S. 279. 238, 90 L. Ed. 67, 66 S. Ct. 112 (1945); Am. Campaign Acad. v.
Commissioner, 92 T.C. 1053, 1065 (1989). When an organization operates for the benefit of
private interests, such as designated individuals, the creator or his family, or persons directly
or indirectly controlled by such private interests, the organization by definition does not operate
exclusively for exempt purposes. Am. Campaign Acad. v. Commissioner, supra at 1065-1066.

Rev. Proc. 2008-9, I.R.B. 2008-2 (January 14, 2008), Section 12, states that a determination
letter or ruling recognizing exemption may be revoked or modified by a notice to the taxpayer
to whom the determination letter or ruling was issued. It went on to say that the revocation or
modification of a determination letter or ruling recognizing exemption may be retroactive if the
organization omitted or misstated a material fact, operated in a manner materially different
from that originally represented, or engaged in a prohibited transaction and where there is a
material change, inconsistent with exemption, in the character, the purpose, or the method of
operation of an organization, revocation or modification will ordinarily take effect as of the date
of such material change.

People of God Community v. Commissioner, 75 T.C. 127 (1980) - "We hold here that paying
over a portion of gross earnings to those vested with the control of a charitable organization
constitutes private inurement as well. All in all, taking a slice off the top should be no less
prohibited than a slice out of net".

United Cancer Council, Inc. v. Commissioner, 165 F.3d 1173, 1176 (1999). — "The term "any
private shareholder or individual" in the inurement clause of section 501(c)(3) of the Internal
Revenue Code has been interpreted to mean an insider of the charity. A charity is not to
siphon its earnings to its founder, or the members of its board, or their families, or anyone else
fairly to be described as an insider, that is, as the equivalent of an owner or manager. The
test is functional. It looks to the reality of control rather than to the insider's place in a formal
table of organization. The insider could be a "mere" employee-or even a nominal outsider,
such as a physician with hospital privileges in a charitable hospital, a case involving a
founder's siphoning of charitable donations, or for that matter a fundraiser. (Cites omitted)

Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1392 (9th Cir. 1985), aff'g T.C. 1984-
349: - tax-exempt status was denied for Church by Mail (Church) on the grounds that Church
operated for the non-exempt purpose of providing a market for the services of Twentieth
Century Advertising Agency (Twentieth), a for-profit organization. The court found that "the
critical inquiry is not whether the particular contractual payments to a related for-profit
organization are reasonable or excessive, but instead whether the entire enterprise is carried
on is such a manner that the for-profit entity benefits substantially" from the operation of the
exempt organization, even if that organization is furthering some exempt purpose.

Government's Position:

It is the position of the Government that after ( ) entered into a
Management and Administration Agreement (Agreement) with
no longer continued to qualify for exemption under Section 501(c)(3) of the Internal Revenue
Code, as it no longer operated exclusively for one or more charitable purposes.

In order to be exempt as an organization described in Code §501(c)(3), an organization must
be both organized and operated exclusively for one or more of the purposes specified in such
section. If an organization fails to meet either the organizational test or the operational test, it
is not exempt. (Regulations §1.501(c)(3)-1(a)(1))

An organization will be regarded as "operated exclusively" for one or more exempt purposes
only if it engages primarily in activities that accomplish one or more of such exempt purposes
specified in Code §501(c)(3). An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose. (Regulations
§1.501(c)(3)-1(c)(1))

Organizational Test

meets the part of qualifying for exempt status, the organizational test. is
organized to provide placement of children in foster homes, to provide adoption services, and
to provide counseling services and training to foster parents. The placement of children in
foster homes and the providing of services and training of foster parents are some of the
exempt purposes specified in Code §501(c)(3).

Operational Test

The operational test is not satisfied where any part of the organization's earnings inure to the
benefit of private shareholders or individuals, and where the organization serves a private
benefit rather than public interests. (Regulations §§1.501(c)(3)-1(c)(2) and 1.501(c)(3)-
1(d)(1)(ii))

Private Benefit

1. At the time of the negotiations for the management agreement between and
   , was the founder and Executive Director of . His wife,
   was the incorporator and sole shareholder of . They both meet the definition of
   "private individual or shareholder" in relation to and respectively, as they
   have a personal and private interest in the activities of the each organization
   (Treas. Reg. § 1.501(a)-1(c)). Typically, those covered under this regulation are
   referred to as "insiders," such as founders, directors, officers, or their families, or
   anyone else fairly to be described as an insider, that is, as equivalent of owner or
   manager (See Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1(d)(1)(i, ii); United Cancer
   Council, Inc. v. Commissioner, 165 F.3d 1173, 1176 (1999)).

2. Since its incorporation on , has been controlled by
   and his wife, ( ). They are of the listed
   officers of and are % shareholders of the corporation. As an officer of ,
   has substantial control of the operations of as evidenced by his
   signing of the Agreements. also exercises control over as evidenced
   by her signing addendums to the Agreement as Asst. CEO of . Therefore, both
   and meet the definition of a private shareholder or individual
   with respect to . (Treas. Reg. §1.501(a)-1(c)).

3. The Management and Administration Agreement

a. The Executive Board Meeting minutes for , stated that:

( ) is a management services company
established by founder and former Executive Director
to provide management consultation on an Agreement for
services basis to and other organizations as appropriate
opportunities arise. will provide executive, fiscal. strategic and
program development management for . The Agreement will
be based upon industry standards and should be established at
% initially and potentially grow, based on reaching program and
fiscal goals, to % or whatever industry standard, fair market-fees
are determined to be.

Due to the current challenges involved in assimilating into
and other budgetary constraints, recommends an
'incremental transition' into the management services
Agreement relationship. The Agreement will begin at a rate
supported by fiscal ability and include executive management
and as the budget allows, the other services listed above will
be added as fiscally appropriate with corresponding increases in
the Agreement fees to %.

The minutes go on to state that:
The contractual Agreement between
and will be presented to the board for review
and approval upon its completion for retroactive initiation date of

As of , will assume the title of Executive Director
and will continue to perform his duties under the authority and
direction of per the management Agreement.

last day on the payroll of
was to be ; the pay period ended on and
was inadvertently paid extra days on the
payroll.

b. The minutes indicate that , while Executive Director of , had
considerable input into the terms of the Agreement. This is evidenced by his
recommendation of an 'incremental transition' into the management
services Agreement relationship and his statement "The Agreement will
begin at a rate supported by fiscal ability and include executive
management and as the budget allows, the other services listed above
will be added as fiscally appropriate with corresponding increases in the
Agreement fees to %".

4. The Agreement was not an "arm's length" transaction. In Information Document
   Request #2, Form 4564, dated , the question was asked:

Question #3 - Did put the management services out for competitive
bidding before awarding it to ?

Question #3 Answer —
board of directors did not see a need to solicit bidding as the
team brought an extensive knowledge base in executive
leadership and the challenges that would face in the ever-
challenging field of foster care. The board of directors was careful
to ensure that the Agreement with was within fair market
values. The Agreement was actually established at a lower than
market standard fee structure, as evidenced by the
reviewed and included in this report.

5. The terms of the Agreement give a substantial amount of control over the
   operations of including in recruiting, recommending for selection, and oversight of
   the Executive Director; budgeting; involvement in the annual independent audit of
   and program development and strategic planning to, among other things, provide for
   long-term growth. According to IDR #2, Q #8C, also works closely with human
   resource staff on personnel issues, including hiring and any disciplinary actions that
   may need to address with personnel. According to IDR #2, Q #9C, also
   produces financial reports and coordinates audit activities with state contract
   audits. According to IDR #2, Q 8C, the primary focus of executive support and
   consultation to the executive director and management team is "strategic planning
   around the achievement of economy of scale," and " meets daily with
   management leading the process of metrics based decision-making, coordinating the
   development of strategic growth plans for each region...."

focus on strategic planning and growth of operations has the effect of
increasing revenues, which in turn increases the fee paid to , as it is based on
a percentage of gross revenue.

pays a substantial amount of money for management services, the vast
majority of which pays out to and in the form of salaries and
distributions to themselves and their trusts. A review of Forms
, for the years under the current contract
determined that approximately percent ( %) of the management fee paid
by was paid out to the and their trusts each year.

is the main client of . A review of Forms
, for the years under the current contract determined that
approximately percent ( %) of the gross income reported by came
from the management fee paid by

6. This case is similar to Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1392 (9th
   Cir. 1985), aff'g T.C. 1984-349. In this case tax-exempt status was denied for Church
   by Mail (Church) on the grounds that Church operated for the non-exempt purpose of
   providing a market for the services of Twentieth Century Advertising Agency
   (Twentieth), a for-profit organization.

The court found that "the critical inquiry is not whether the particular contractual
payments to a related for-profit organization are reasonable or excessive, but instead
whether the entire enterprise is carried on is such a manner that the for-profit entity
benefits substantially" from the operation of the exempt organization, even if that
organization is furthering some exempt purpose.

In this case, benefits substantially from the operations of . According to the
Agreement, receives a percentage of the gross income of . Over the course of
the Agreement, received approximately % of its income from the management
fees produced by the Agreement. Without the fees generated by the Agreement,
would not be a going concern. This indicates, as in Church, the entire enterprise is
carried on in such a manner that the for-profit entity benefits substantially.

With these facts in mind, does not meet the requirements of Regulations §§1.501(c)(3)-
1(c)(2), as earnings serve a private benefit to and the by their 'Insider' status
in , rather than public interests.

Inurement

Since its incorporation on , has been controlled by and his
wife, ( ). They are of the listed officers of and are %
shareholders of the corporation. As an officer of , has substantial control of the
operations of as evidenced by his signing of the Agreements. also exercises
control over as evidenced by her signing addendums to the Agreement as Asst. CEO of
. Therefore, both and meet the definition of a private shareholder or
individual with respect to . (Treas. Reg. §1.501(a)-1(c)).

Operation prior to the Agreement

1. Prior to the Agreement all management functions of were performed by
   administrators of . This is confirmed by answers to questions asked in Information
   Document Request #2, Form 4564, dated , the question was asked:

Question #2(b) — If did not hire any other management services
companies before it hired , who previously performed the
services that are now being performed by ?

answered this question in a response dated

Answer (b) — The key administrators of performed these duties.

The Management and Administration Agreement

2. The Executive Board Meeting minutes for , stated that:

( ) is a management services company
established by founder and former Executive Director to
provide management consultation on an Agreement for services basis
to and other organizations as appropriate opportunities arise.
will provide executive, fiscal. strategic and program development
management for . The Agreement will be based upon industry
standards and should be established at % initially and potentially
grow, based on reaching program and fiscal goals, to % or whatever
industry standard, fair market-fees are determined to be.

Due to the current challenges involved in assimilating into
and other budgetary constraints, recommends an
'incremental transition' into the management services Agreement
relationship. The Agreement will begin at a rate supported by fiscal
ability and include executive management and as the budget allows,
the other services listed above will be added as fiscally appropriate with
corresponding increases in the Agreement fees to %.

The minutes go on to state that:

The contractual Agreement between and
will be presented to the board for review and approval
upon its completion for retroactive initiation date of

As of , will assume the title of Executive Director and
will continue to perform his duties under the authority and direction of
per the management Agreement.

last day on the payroll of was
to be ; the pay period ended on and was
inadvertently paid extra days on the
payroll.

3. The minutes indicate that , while Executive Director of , had considerable
   input into the terms of the Agreement. This is evidenced by his recommendation of
   an 'incremental transition' into the management services Agreement
   relationship and his statement "The Agreement will begin at a rate supported by
   fiscal ability and include executive management and as the budget
   allows, the other services listed above will be added as fiscally appropriate with
   corresponding increases in the Agreement fees to %".

The Agreement was not an "arm's length" transaction. In Information Document
Request #2, Form 4564, dated , the question was asked:

Question #3 - Did put the management services out for competitive
bidding before awarding it to ?
Question #3 Answer —

board of directors did not see a need to solicit bidding as the
team brought an extensive knowledge base in executive
leadership and the challenges that would face in the ever-
challenging field of foster care. The board of directors was careful
to ensure that the Agreement with was within fair market
values. The Agreement was actually established at a lower than
market standard fee structure, as evidenced by the
reviewed and included in this report.

4. The Agreement gave a substantial amount of control of operations to . The
   Agreement states that for Agreement purposes is referred
   to as an Corporation (herein " " or Manager or
   Administrator). The agreement states that:

ii. shall recruit, recommend for selection and provide
oversight Executive Director who is responsible
for the fulfillment of contractual obligations.

iii. shall provide, supervise and administer a
comprehensive program of quality standards and assurance
in compliance with applicable state and referring agency
regulations, standards and policies.

iv. shall provide, supervise and administer appropriate
budgeting processes for to assure fiscal
responsibility in accordance with generally accepted
accounting practice and shall insure satisfactory
completion of an annual independent audit in compliance
with state and agency regulatory standards.

v. shall provide, supervise administration for program
development and strategic planning to accomplish program
objectives and to provide for long term growth.

5. The terms of the Agreement give a substantial amount of control over the
   operations of including in recruiting, recommending for selection, and oversight of
   the Executive Director; budgeting; involvement in the annual independent audit of
   and program development and strategic planning to, among other things, provide for
   long-term growth.

According to answers received IDR #2, dated

Question #8 - Please provide a narrative description of the typical services
performs for in a given week including (c), Who
performs those services

Question #8C answers —
a) also works closely with human resource staff on personnel
issues, including hiring and any disciplinary actions that may need
to address with personnel.

b) The primary focus of executive support and consultation to the
executive director and management team is "strategic planning around the
achievement of economy of scale," and " meets daily with
management leading the process of metrics based decision-making,
coordinating the development of strategic growth plans for each
region...."

Question #9 - Please provide a narrative description of the services
performed occasionally or on a set schedule e.g., monthly, quarterly,
or yearly and the services performed on an ad hoc/as needed basis,
including: c.) Who performs these?

Question #9C answer —
also produces financial reports and coordinates audit activities
with state contract audits.

focus on strategic planning and growth of operations has the effect of
increasing revenues, which in turn increases the fee paid to , as it is based on
a percentage of gross revenue

is the founder of . He left when the Agreement was signed. He and
his wife have control of and are % shareholders of . As such, &
are "Insiders" in and by inference . The larger the fees collected from
by , the larger the income to the shareholders of . Thus and
meet the definition of private shareholders or individuals referred to in section 501 of the
Regulations as persons having a personal and private interest in the activities of the
(Regulation 1-501(a)-1(c))

pays a substantial amount of money for management services, the vast
majority of which pays out to and in the form of salaries and
distributions to themselves and their trusts. A review of Forms
, for the years under the current contract
determined that approximately percent ( %) of the management fee paid
by was paid out to the and their trusts each year.

This is a similar fact pattern to People of God Community v. Commissioner, 75 T.C. 127
(1980). In People of God, the salaries of the ministers of the Christian church were
based on a predetermined percentage of the gross tithes and offerings received. The
court held that part of the church's net earnings inured to the benefit of private
individuals. This finding caused the court to determine that the church was not exempt
as an organization described in IRC §501(c)(3).

The major difference between People of God and this case is the insertion of
between and the . In People of God the ministers controlled the church
directly. In this case the Agreement gave substantial control of to , with &
controlling by being the CEO and Asst. CEO respectively.

As in the People of God case, the Agreement set management fees paid by to
at a predetermined percentage of gross income.

In People of God, the court stated that:

"We hold here that paying over a portion of gross earnings to those vested
with the control of a charitable organization constitutes private inurement as
well. All in all, taking a slice off the top should be no less prohibited than a
slice out of net".

The court continued:

What is prohibited is inurement "to the benefit of any private shareholder or
individual." The term "private shareholder or individual" refers to persons who
have a personal and private interest in the payor organization. The term does
not refer to unrelated third parties. In other words, section 501(c)(3) denies
exempt status to an organization whose founders or controlling members
have a personal stake in that organization's receipts. Such is the case here,
where petitioner's ministers, and Donhowe, in particular, completely control its
affairs. Petitioner therefore fails to qualify for exemption under section
501(c)(3). (citations omitted)

In this case the Agreement gives a substantial amount of control of operations.
has a stake in gross receipts. The better performs, the higher the fees
received by

The operational test is not satisfied where any part of the organization's earnings inure
to the benefit of private shareholders or individuals, and where the organization serves
a private benefit rather than public interests. (Regulations §1.501(c)(3)-1(c)(2))
As in People of God, fails to qualify for exemption under section 501(c)(3).

7. is the main client of . benefits substantially from the operation of

The Agreement's fee structure provides that "Compensation rates are in accordance
with general business standards as researched and verified through organization
filings, ranging from % to %. Current rate is % of gross revenue as
adjusted for corrections and refunds less bad debt with adjustments made for
annual reconciliation. Compensation may be increased based on current market
analysis and mutual Agreement between both parties during the life of the
Agreement".

With these facts in mind, does not meet the requirements of Regulations §§1.501(c)(3)-
1(c)(2) and 1.501(c)(3)-1(d)(1)(ii) as earnings serves a private benefit rather than public
interests.

Revocation

Regulations §1.501(c)(3)-1(f)(ii) provides that In determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization described in
section 501(c)(3) that engages in one or more excess benefit transactions that violate the
prohibition on inurement under section 501(c)(3), the Commissioner will consider all
relevant facts and circumstances, including, but not limited to, the following -

(A) The size and scope of the organization's regular and ongoing activities that
further exempt purposes before and after the excess benefit transaction or
transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively,
if more than one) in relation to the size and scope of the organization's regular
and ongoing activities that further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit
transactions with one or more persons;

(D) Whether the organization has implemented safeguards that are reasonably
calculated to prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning
of section 4958(f)(6) and § 53.4958-7), or the organization has made good faith
efforts to seek correction from the disqualified person(s) who benefited from the
excess benefit transaction.

The most relevant considerations in this case are C, D, and E of the regulation. has
been involved in the excess benefit transactions that violate the prohibition on inurement
under section 501(c)(3) since the adoption of the original agreement in of .
Since the original agreement was signed, and have been "Insiders" in relation
to . They have both been officers of and only shareholders. The signing of
the agreement did nothing to modify the agreement in any way that would prohibit
the control and fee structure of the agreement from enabling and to receive
funds that inured to their private benefit.

The agreement was not an "arms-length" transaction. The organization made no attempt
to put the management services out for competitive bidding before awarding it to
In IDR #2, Question #3, stated that:

board of directors did not see a need to solicit bidding as the
team brought an extensive knowledge base in executive leadership
and the challenges that would face in the ever-challenging field
of foster care. The board of directors was careful to ensure that the
Agreement with was within fair market values. The Agreement
was actually established at a lower than market standard fee
structure, as evidenced by the reviewed and included in this
report.

The Agreement gave substantial control of operations to and by inference,
and . As discussed above, in People of God v. Commissioner, the court found
that:

"We hold here that paying over a portion of gross earnings to those vested
with the control of a charitable organization constitutes private inurement
as well. All in all, taking a slice off the top should be no less prohibited than
a slice out of net".

and its Board have not made good faith efforts to seek correction from and
who benefited from the excess benefit transactions. Amendments to the
Agreement were made to increase the percentage of gross income paid by as
management fee, but no control modification amendments were included.

Considering the above facts and circumstances, should not continue to be recognized as
an organization having the tax-exempt status of an applicable tax-exempt organization
described in section 501(c)(3). (Regulations §1.501(c)(3)-1(f)(ii), example 3(iii))

Conclusions

The Service has sufficient information / evidence to establish the Agreement between and
exhibits a pattern of control over the operations of . is the founder of
He left when the Agreement was signed. and have control of
and are % shareholders of . As such, & have a personal and private
interest in and by inference (Reg. §1.501(c)(3)-1(c)(2)).

pays a substantial amount of money for management services, the vast majority of
which pays out to and in the form of salaries and distributions to themselves
and their trusts. A review of Forms
for the years under the current contract determined that approximately percent
( %) of the management fee paid by was paid out to the and their trusts each
year.

We believe that paying the excise taxes and making corrections would not be sufficient to
allow to retain its tax-exempt status since would continue to be controlled by the
through the Agreement, thus continuing the practice of using substantial assets
for the private benefit of the same individuals. As long as the Agreement is in place, it will
continue to disqualify from exemption.

should lose its tax-exempt status. In addition, given the fact pattern of abuse, non-
profit private foundation status should be terminated pursuant to IRC §507(a)(2) and
Regulations §1.501(c)(3)-1(f)(ii), example 3(iii))

The revocation should be effective (the day of the audit period). will be
required to file Form 1120 for all tax years since , inclusive.

Taxpayer Position

Catalog Number 20810W
www.irs.gov
Form 886-A (Rev. 5-2017)